CHAPTER 1

INTRODUCTION TO ACCOUNTING
Content Standard:

The learners demonstrate an understanding of…the definition, nature,

function, and history of accounting.

Performance Standard
The learners shall be able to cite specific examples in which accounting is used in
making business decisions
Learning Competency/ Code

The learners…
1. Define accounting- ABM_FABM11- IIIa-1
2. Describe the nature of accounting- ABM_FABM11- IIIa-2
3. Explain the functions of accounting in business- ABM_FABM11- IIIa-3
4. Narrate the history/origin of accounting- ABM_FABM11- IIIa-4

LEARNING OUTCOMES
L.O. 1 Understand basic types, goals, and implications of financial management.
L.O. 2 Identify the legal forms of business.
L.O. 3 Know the foundation of finance.

DISCUSSION PROPER
1 INTRODUCTION:
Accounting is a system meant for measuring business activities, processing of
information into reports and making it available to decision-makers. The basis for the
recording of transactions are called source documents. Financial reports are prepared
to communicate the performance of an organization in monetary terms. That is why,
accounting is considered as the Language of Business. However, a business may have a
lot of aspects which may not be of financial nature.
The Language of Financial Decisions. The better the understanding of the language, the
better is the management of financial aspects of living. Many aspects of our lives are
based on accounting, personal financial planning, investments, income-tax, loans, etc.
We have different roles to perform in life-the role of a student, of a family head, of a
manager, of an investor, etc. The knowledge of accounting is an added advantage in
performing different roles. However, we shall limit our scope of discussion to a business
organization and the various financial aspects of such an organization. When we focus
our thoughts on a business organization, many questions (is our business profitable,
should a new product line be introduced, are the sales sufficient, etc.) strike our mind.
To answer questions of such nature, we need to have information generated through
the accounting process. The people who take policy decisions and frame business plans
use such information. All business organizations work in an ever-changing dynamic
environment. Any new program of the organization or of its competitor will affect the
business. Accounting serves as an effective tool for measuring the financial pulse rate of
the company. It is a continuous cycle of measurement of results and reporting of results
to decision makers.
Just like arithmetic is a procedural element of mathematics, book keeping is the
procedural element of accounting.

Figure 1 shows how an accounting system operates in business and how the flow of
information occurs.

Pe opl e ma k e dec i s i ons

B us i ne s s tra ns a c ti ons oc c ur

R e p o rt s a re p r e p a r e d t o s h o w re s ul ts
of bus i nes s ope ra ti on

LESSON 1: DEFINITION
Accounting Defined
Technical definitions of accounting have been published by different accounting
bodies. The American Institute of Certified Public Accountants (AICPA) defines
accounting as:

the art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least of financial character, and
interpreting the results thereof.

a. Accounting is considered an art and a science

Accounting is considered an art because it requires the use of skills and creative
judgment. One has to be trained in this discipline to be able to perform accounting
functions well.

Accounting is also considered a science because it is a body of knowledge. However,

accounting is not an exact science since the rules and principles are constantly changing
(improved).

b. Accounting involves interconnected "phases"

Recording pertains to writing down or keeping records of business transactions.

Classifying involves grouping similar items that have been recorded. Once they are
classified, information is summarized into reports which we call financial statements.

c. Concerned with transactions and events having financial character

For example, hiring an additional employee is qualitative information with no

financial character. Hence, it is not recorded. However, the payment of salaries,
acquisition of an office building, sale of goods, etc. are recorded because they involve
financial value.

d. Business transactions are expressed in terms of money

They are assigned amounts when processed in an accounting system. Using one
of the examples above, it is not enough to record that the company paid salaries for
April. It must include monetary figures – say for example, Php20, 000 salaries expense.

e. Interpreting the results

Interpreting results is part of the phases of accounting. Information is useless if

they cannot be interpreted and understood. The amounts, figures, and other data in the
financial reports have meanings that are useful to the users.

LESSON 2: Scope of Accounting:

Scope

Accounting has got a very wide scope and area of application. Its use is not
confined to the business world alone, but spread over in all the spheres of the society
and in all professions. Now-a-days, in any social institution or professional activity,
whether that is profit earning or not, financial transactions must take place. So there
arises the need for recording and summarizing these transactions when they occur and
the necessity of finding out the net result of the same after the expiry of a certain fixed
period. Besides, there is also the need for interpretation and communication of
those information to the appropriate persons. Only accounting use can help overcome
these problems.
In the modern world, accounting system is practiced not only in all the
business institutions but also in many non-trading institutions like Schools, Colleges,
Hospitals, etc. and also Government Accounting methods are used by all who are
involved in a series of financial transactions.
The scope of accounting as it was in earlier days has undergone lots of changes
in recent times. As accounting is a dynamic subject, its scope and area of operation have
been always increasing keeping pace with the changes in socio-economic changes. As a
result of continuous research in this field the new areas of application of accounting
principles and policies are emerged. National accounting, human resources accounting
and social Accounting are examples of the new areas of application of accounting
systems.

Lesson 3: Nature of Accounting:

 Accounting is the systematic recording of financial transactions and presentation
of the related information of the appropriate persons.
The basic features of accounting are as follows:
1. Accounting is a process: A process refers to the method of performing any specific
job step by step according to the objectives, or target. Accounting is identified as a
process as it performs the specific task of collecting, processing and
communicating financial information. In doing so, it follows some definite steps
like collection of data recording, classification summarization, finalization and
reporting.

2. Accounting is an art: Accounting is an art of recording, classifying,

summarizing and finalizing the financial data. The word ‘art’ refers to the way of
performing something. It is a behavioral knowledge involving certain creativity and
skill that may help us to attain some specific objectives. Accounting is a
systematic method consisting of definite techniques and its proper application requires
applied skill and expertise.

3. Accounting is means and not an end: Accounting finds out the financial results
and position of an entity and the same time, it communicates this information to its
users. The users then take their own decisions on the basis of such information. So, it
can be said that mere keeping of accounts can be the primary objective of any person
or entity. On the other hand, the main objective may be identified as taking
decisions on the basis of financial information supplied by accounting. Thus,
accounting itself is not an objective, it helps attaining a specific objective. So it is
said the accounting is ‘a means to an end’ and it is not ‘an end in itself.’

4. Accounting deals with financial information and transactions; Accounting records

the financial transactions and date after classifying the same and finalizes their
result for a definite period for conveying them to their users. So, from starting to the
end, at every stage, accounting deals with financial information. Only financial
information is its subject matter. It does not deal with non-monetary information of
non-financial aspect.

5. Accounting is an information system: Accounting is recognized and

characterized as a storehouse of information. As a service function, it collects processes
and communicates financial information of any entity. This discipline of
knowledge has been evolved out to meet the need of financial information required
by different interested groups.
 LESSON 4: Functions of Accounting
 Systematic record keeping: The first and foremost function of accounting is the
systematic record keeping of the financial transactions, on a regular basis.
 Facilitating rational decision making: Another important function of accounting is to
communicate the results, i.e. the net profit or loss to the users, with the help of
financial statements, so as to help the interested parties in rational decision making.
 Legal compliance: The accounting statements must be prepared keeping in mind the
compliance with the relevant laws.
 Protection of business assets: Accounting not only keeps a record of all the business
assets but also ensures no unauthorized use of assets or property belonging to the
enterprise.
 Determination of Profit/loss: Accounting plays a very important role in the
ascertainment of profit earned or loss sustained by the enterprise in an accounting
period. This is possible only when a proper record of all the business transactions,
revenues and expenses are maintained.
 Ascertaining the profitability, liquidity and solvency of the entity: With the help of
the financial statement, i.e. Balance sheet and profit and loss account, the financial
position of the enterprise can easily be ascertained.
The fundamental objective of accounting is to keep complete records of the business
transactions, so as to determine the financial performance and position of the
enterprise and convey the information to the user groups such as shareholders,
employees, creditors, suppliers, government and other groups.
LESSONS 5: Development of Accounting (History)
The history of accounting can be traced back to ancient times. According to
some beliefs, the very art of writing originated in order to record accounting
information. Though this may seem to be an exaggeration, but there is no denying the
fact that accounting has a long history. Accounting records can be traced back to the
ancient civilizations of China, Babylonia, Greece and Egypt. Accounting was used to keep
records regarding the cost of labor and materials used in building great structures like
the Pyramids. During 1400s, accounting grew further because the needs for information
of merchants in the Venis City of Italy increased. The first known description of double
entry book keeping was first published in 1994 by Lucas Pacioli. He was a mathematician
and a friend of Leonardo Ileda Vinci. The onset of the industrial revolution necessitated
the development of more sophisticated accounting system, rather than pricing the
goods based on guesses about the costs. The increase in competition and mass
production of goods led to the rise of accounting as a formal branch of study. With the
passage of time, the corporate world grew. In the nineteenth century, companies came
up in many areas of infrastructure like the railways, steel, communication, etc. It led to a
rapid growth in accounting. As the complexities of business grew, ownership and
management of business was divorced. As such, managers had to come up with well-
defined, structured systems of accounting to report the performance of the business to
its owners. Government also has had a lot to do with more accounting developments.
The Income Tax brought about the concept of ‘income’. Government takes a host of
other decisions, relating to education, health, economic planning, for which it needs
accurate and reliable information. As such, the government demands stringent
accountability in the corporate sector, which forces the accounting process to be as
objective and formal as possible.

CHAPTER SUMMARY:

 Accounting is the art of recording, classifying, and summarizing in a

significant manner and in terms of money, transactions and events which are, in
part at least of financial character, and interpreting the results thereof.

 Nature of accounting: Accounting is a process, an art, a systematic method,

a means and not an end, deals with financial information and transactions
an information system.

 Functions of Accounting: Systematic record keeping, facilitating rational

decision making: legal compliance, protection of business assets, determination
of Profit/loss, ascertaining the profitability, liquidity and solvency of the entity.
 History of Accounting: From its early development in Mesopotamia to the
modern day accounting.